Volcker Rule: The day of reckoning is near

At a glance

The latest buzz surrounding the Volcker Rule has centered on when the “final” rule will be issued and how different it will be from the proposal. Among the five agencies that must agree on the rule’s next iteration, it is our view that the CFTC has been the last piece of the puzzle for several months. That the latest round of chatter largely stems from this agency suggests the pieces are finally coming together.

Chairman Gensler recently indicated that the CFTC will vote on the rule in December. With his departure by the end of this year, and news that Commissioner Chilton will soon be stepping down (leaving the CFTC with only two of five commissioners come January), he has more incentive than ever to vote the rule out. Combine this motivation with Treasury Secretary Lew’s push to complete the rule, and it is fair to expect it by the end of the year (likely in the form of an interim final rule, discussed below).

However, we believe that the timing of the rule’s completion is less important than its content and whether banks are ready to meet the rule’s requirements. Our view is that the rule will end up longer and tougher than the proposal, but less complicated. The rule will be tougher, for example, by limiting the use of macro and portfolio hedging to meet the hedging exemption. It will be less complicated by requiring banks to review and report fewer metrics to prove they are not proprietary trading.

With a final rule nearing, banks must re-assess where they are on Volcker and ensure that they have a strategy – and the resources – to meet its requirements. We have already seen at least one bank undergo a formal examination by a US regulator regarding its Volcker “good faith” conformance to date, so more examinations are coming.

The other topic of debate has been whether the conformance period will be extended beyond the current July 21, 2014 deadline. We see a blanket extension of the conformance period as less likely than the Federal Reserve (“Fed”) granting extensions on an individual basis. The Fed is the only agency with authority over the conformance period and has issued a final rule allowing for up to three one-year extensions on a case by case basis, upon a bank’s request and the Fed’s approval. The challenge is that this extension request must be filed by January 2014 (i.e., 180 days before July 21, 2014), so time will be short to make the case based on a Volcker Rule that comes out next month. Accordingly, some institutions have already begun drafting their request based on the existing proposal.

This Financial Services Regulatory Brief provides our view of (a) changes to expect in the Volcker Rule, (b) where banks are now with respect to their “good faith” conformance, and (c) the key challenges ahead.